Following the Christmas break, shares of BioSante (NASDAQ:BPAX) soared more than 27% during Monday’s session on volume of 10.57M shares versus an average of 251,478, leaving investors hungry for the company’s potential in its upcoming FDA catalysts in early 2011, as highlighted by our previous article. All seemed well going into the next trading session, that is, until the after-hours session when news of a registered direct offering sparked newly found worries striking fear in the hearts of current and potential shareholders.

To those who follow the biotech industry religiously, this occurrence shouldn’t catch anyone off guard, and in most cases does not pose a major roadblock for an undervalued company whose investment purposes should be for the long-haul rather than flipping a few pennies on the dollar. As an immediate example, during the month of December, no less than three highly profiled biotech companies with upcoming catalysts decided to raise cash ahead of these events.

These include:

EnteroMedics (NASDAQ:ETRM), on December 9th, announced a public offering of $25.9 million at $1.75 per share, at a time when its price was trading at $2.45 per share. The very next trading day, shares popped way past the offering price and moved to $2.20 on heavy volume. Since then, it has gone on to gain a cool 25% while maintaining a steady uptrend. The company expects to medical device study for its product, Maestro System during 2nd half of 2011.

Lannett Company (AMEX:LCI), on December 13th, announced a public offering of 5,000,000 shares of its common stock at a price of $5.00 per share. Many expected news of dilution ahead of the pending FDA decision for its flagship product, Morphone Sulfate Oral Solution. Shares dropped initially from its 52-week high peak of $7.00 down to $5.00, yet managed to find solid support and is now rebounding once again with shares now at $5.32 in anticipation of the potential marketability of its product.

YM BioSciences (AMEX:YMI), on December 14th, announced a public offering of $40 million at $1.60 per share when its price was trading at $1.80 in the previous session. Since then, the shares have gone on to rally to a new 52-week high of $2.55, and are now up 31% as of today’s close to $2.32. The company has a slew of phase 1, 2 and 3 clinical trials which should be reported during 1st half of 2011.

It is important to note that in all three of these public offerings, not one of the companies managed to raise funds from institutional investors, rather opting to simply exchange shares on the open market.

Understanding Differences in Public Offerings

Many began questioning the timing of BioSante’s raising of cash in light of the recent run up in price, causing the blog-o-sphere and retail investors to begin worrying about the situation without really, and truly understanding it.

First of all, there is a very clear and distinctive difference in a common share offering to the public, than that of institutional investors. In most cases, small biotech companies looking to raise cash will generally opt to sell securities on the open market due to the fact that financing does not come easy, or in other words, you need a damn good product pipeline with blockbuster potential in order to even receive a consideration, never mind a final commitment of financing from large corporations.

Herein lies the key to understanding today’s event, whereby BioSante is opting to raise $18 million through several high quality biotechnology institutional investors, choosing to boost its major holders percentage to 40% of the share float. So ask yourself this question: Would you rather have retail investors who day-trade the stock for “bio run-up catalyst” purposes, or become a part of institutional investors who now create a solid support at the now $1.70 purchase price which also coincidentally coincides with the 50-week moving average?

The real lesson here is learning to read between the lines, understanding why the price of the direct offer was settled higher than the closing price of the last trading session. Institutional investors have access to a much more sophisticated trading system than most retail investors can understand, more often times than not, even to medical experts who offer real insights into the potential approval of a product. Therefore, based on this premise, it becomes evidentily clear why having long-term experts investing in your company becomes infinitely more valuable than a bag full of day-traders on the open market.

Furthermore, though this was private placement, meaning new shares are being issued of the stock. This includes 10.6M plus 5.3M warrants which convert at a 2:1 ratio, leaving the total possibility of new shares if all warrants are executed at 13.25M. This may be indeed slightly dilutive as far as current price per share for current shareholders in the short-term, however, what doesn’t change is the float, since those new shares are locked up by the institutional investors. In the end, most importantly is the fact that the short ratio doesn’t change, meaning there are no more shares available to borrow today than there were last week. This leaves plenty of opportunities for current and new potential shareholders to enter new positions should the price drop back down to the $1.70 offering price, or 15% from Monday’s closing price.

Update on Key Catalysts

BioSante is currently conducting three Phase III LibiGel clinical studies, enrolling well over 2,500 women into the study and to date, according to company reports, the safety of LibiGel looks excellent. The rate of cardiovascular events that have been reported in the study is significantly lower than was predicted for this population of women, and the rate of breast cancer reported is close to predicted. The main objective is to show the safety of LibiGel in the treatment of female sexual dysfunction for which there is no FDA approved product today.

According to Stephen M. Simes, President and CEO, “Our objective is to submit the new drug application (NDA) in 2011 for a potential approval and launch in 2012. We believe LibiGel will be the first product to enter this market [for women], notwithstanding the fact that Viagra was approved for men over 12 years ago.”

The forecast for the size of the potential market for female sexual dysfunction products varies from $2 billion up to $5 billion. The market for erectile dysfunction products like Viagra is over $2 billion just in the U.S. Data from the company suggests that LibiGel alone has the potential to be a $1 billion per year product, representing nearly 10x the current market capitalization of the company.

Moreover, perhaps the most overlooked aspect is the full pipeline of cancer vaccines in clinical trials. There are a total of 12 ongoing clinical trials in pancreatic cancer and breast cancer among other cancer types. Data to date, according to the CEO, as been excellent.

Options Forecasting Positive Events

Perhaps one of the more telling tools in anticipating upcoming events is the options activities for the months ahead. BioSante saw tremendous call option activity at the March 18, $2.50 strike price with 226 volume, 1,109 open interest as the price gained a whopping $300%. Similarly, in on the June 17 call options we saw a lot of action on the $2.50 strike price with 762 volume and 206 open interest, showing that nearly all traders looking to buy the options had done so during the trading session. This caused the options to gain 100% from its previous close. However, more interestingly is the fact that put options traders, those betting the stock will continue to depreciate, began to sell their options at market price, almost in panic-like fashion, causing them to lose 44% from the previous close. A total 1,530 put-options were traded during Monday’s session.

Disclosure: Long BPAX

The charts and comments are only the author’s view of market activity and aren’t recommendations to buy or sell any security. Market sectors and related stocks are selected based on his opinion as to their importance in providing the viewer a comprehensive summary of market conditions for the featured period. Chart annotations aren’t predictive of any future market action rather they only demonstrate the author’s opinion as to a range of possibilities going forward.

TheMarketFinancial is not paid, compensated or in any way incentivized to report news and developments about publicly traded companies, unless otherwise stated.